China Raises Interest Rates To Battle Inflation

BEIJING: China's central bank took aim at inflation once again on Monday by saying it will control lending and money growth in the world's second-biggest economy to head off price pressures and asset bubbles.

In a statement on the central bank's website (www.pbc.gov.cn), Hu Xiaolian, a deputy governor, said China had been normalizing policy and will explore new ways to manage excess cash, which is seen as a major driver behind 28-month high inflation.

Her remarks reinforced statements from China's top leaders that the task of taming inflation will be a priority for Beijing next year.

"An implementation of prudent monetary policy is helpful in strengthening the management of inflationary expectations and in fending off asset bubbles," Hu said.

On Saturday -- Christmas Day -- the central bank surprised investors with a 25-basis-point rate rise in benchmark deposit and lending rates, its second increase in just over two months.

Hu reiterated the central bank's determination to drain excess cash from the financial system by using all tools at its disposal: interest rates, reserve requirement ratios, open market operations and more.

"We will explore new tools ... to keep a good control on the gate of liquidity," she said, but did not indicate what these might be.

A steady stream of anti-inflation talk from the Chinese central bank has led many investors to bet on more rate increases in 2011.

A Reuters poll showed investors see the benchmark one-year deposit rate rising to 3.25 percent by the end of next year, from 2.75 percent now.

The specter of more tightening cast a pall over Chinese stocks on Monday, though investors abroad were more sanguine, in part due to confidence that China's steady tightening is a sign of solid growth in its vast economy.

In a separate statement, the monetary policy committee within the central bank noted China's economic resilience, but with a touch of caution.

"The improving trend in our economy is solidifying and the financial system is working smoothly," the committee said after a quarterly meeting.

"But it is still a pressing task to manage credit, money and liquidity as well as cut financial risks," it said.

The committee has no decision-making powers within the central bank. The central bank in turn has no autonomy over monetary policy and any move on interest rates has to be approved by the highest echelons of power within the government.

(Reporting by Langi Chiang, Aileen Wang and Koh Gui Qing; Editing by Simon Rabinovitch and Ben Blanchard)

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[AlexABC]

02:08 PM on 12/29/2010

This inflation has been in the works for a long time. Money supply increased by over 50% in the last two years and the fixed exchange rate further contributes to such excess liquidity. What do you expect? These interest rates are being driven by inflation and are, in effect, an involuntary reaction to factors beyond the PBoC's control:

http://chovanec.wordpress.com/2010/10/20/chinas-interest-rate-hike/

Andy Xie has also predicted that China and America are in a race to the bottom, in terms of who will collapse first: China via runaway inflation or the US via sovereign debt ills:

http://english.caing.com/2010-12-23/100210360.html

China could either overplay its hand with tightening measures (and hence reduce growth to around 3-5%) or let inflation get out of control otherwise. The US has also ordered up another free lunch in terms of the Obama tax cuts. It's hard to say who will go down first.

[Zhuubaajie]

02:42 PM on 12/28/2010

Americans believe that they’re heavily taxed. Yet they pay less in taxes than citizens in other rich countries. U.S. tax burden In 2009 was 9.2 percent of personal income (lowest since 1950), versus 12 percent over the past half-century.

“Government initiated successes have been vital for U.S. business at all levels. Without them, businesses large and small would never have prospered. In fact, throughout postwar history, the greatest American achievements have all been public-private partnerships, with Washington taking the initiative and harnessing the ingenuity, expertise and managerial talent of the private sector. It stands to reason that if we are to overcome current challenges, we should rely on a model that has worked so well in the past.”

I think that is a good prescription. Learn from the Chinese – be ready to reform if the country does not appear to be going in the right direction.

[Zhuubaajie]

02:40 PM on 12/28/2010

What the Chinese is demonstrating is that government action is indispensable. After 2008, the key is how to return the economy to growth.
The public sector may not be efficient, but it provides goods and services which the short-term profits driven private sector simply will not. Over the last century, the federal government (not Exxon, AT&T, or even Boeing) fought and defeated Germany and Japan in world wars, created the postwar global economic system and built history’s most formidable military. In science, federal programs developed the space program, the internet, and gave a leg up to the high-tech sector. Governments built interstate highways, underpinned the world’s best academic research establishment and defeated the crime wave of the 1970s and 1980s.
Of course the same U.S. government also did a lot of damage by many of its pigheaded decisions, and the never-ending efforts at covering up the mismanagement. The latest $3.3 Trillion largesse to the banksters, followed now by QE2, is a prime example. But cutting back on government is not solution. Better or smarter government is.

[kenhamlett]

12:09 AM on 12/28/2010

The Chinese will manage their problems better than we are managing ours, sadly. But, it is scary indeed to see their economy with problems, since they hold so much of our debt and control so much of our economic future. If they get a cold, we can expect pneumonia.

[mike72]

05:15 AM on 12/28/2010

US should follow the North Korean national motto: SELF RELIANT.

Only when you can be more self reliant and depends less on foreign resources can your economy be steady.

But would US do it? It is addicted to print paper money and expect resources coming to its shore for it to consume. Easy life.

So when China get a cold, we freak out. Life of being bl**d suckers and free loaders are not easy, you know.

[mike72]

08:46 PM on 12/27/2010

Chinese are soft-popping the bubble that they have created during the 2008 financial crisis.

They are manuvering a soft landing.

I have to admire the Chinese for their well planned operations. They know exactly when to hype up the economy and when to slow down.

[globality]

12:29 PM on 12/28/2010

A lot easier without free press, thought, or market

[Zhuubaajie]

02:13 PM on 12/28/2010

Snide remarks do not change reality. Beijing is just better at doing just about everything. Look back at the last 20 years. It had made very few mistakes, and when it did, it quickly made amends and went back on the right track.

Lack of "free press" is a misconception. There certainly is lack of the irresponsible "reporting" you see in the West. Journalism, especially reporting on iniquities and corruption, has served China well in the last 20 years. The tradition continues.

Lack of thought? Hmm. That's a new one. So the giant nation and the most vibrant economy in human history in the last quarter century simply ran on autopilot? Hmm, that autopilot system should definitely get a Nobel prize on economics!! But seriously, if you look at the sucessive (and successful) 5 year plans and how they were executed, you would appreciate the amounts of careful thought that went into bettering the lives of hundreds of millions.

Markets? China's markets today are some of the free-est in the world. The competition is fierce and only the best prevail.

[Scent]

03:14 PM on 12/27/2010

When I read this I thought they did a return Volkher shock. - That criminal raised interest rates to over 21 percent so the newly developing democracies where we had installed dictators they got rid of had to repay the tool they were tortured and executed with with an interest rate so high they could never hope to call themselves free.

After that I think we richly deserve to have the rate of what WE owe others raised to that kind of level to make even thickheaded US realize hwo criminal our acts were.

[halfpricefaustian]

02:27 PM on 12/27/2010

They are "normalizing policy". Since they tie the value of their currency to ours, does this mean they are printing boatloads of renminbi to match our printing of dollars?

[mike72]

09:06 PM on 12/27/2010

They ALWAYS print renminbi to match US Dollars. You can not use or directly "own" US Dollars, in banking sense, in China. Instead, for each US Dollar you gain from export, you are given the equivalent amount in renminibi. The government keeps all the US Dollars and put them in reserves.

This is China's Financial Great Wall against the hot money from the invading "barbarians" :)

It ensure China's financial stability and ensure that the economy is in tight control by the government.

[mike72]

09:09 PM on 12/27/2010

As an individual, by law, you are allow to exchange $50K worth of US Dollars EACH YEAR for your expense and investment in China.

[Sixtracks]

12:31 PM on 12/27/2010

If America wants to regain its place in the world, they really need to impose a tariff on ALL of the criminally cheap products that flood the US markets. There is NO way to compete with sl@ve wages.

[Lahonda]

12:46 PM on 12/27/2010

Stop selling plastic "stuff." Germany has a burgeoning (socialistic) economy which is supported by quality goods delivered to a discerning consumer base.

[Sixtracks]

01:27 PM on 12/27/2010

Germany is tops in my book.

[joe kim]

10:56 AM on 12/27/2010

So sad to see the Chinese are doing the right thing, while we continue to keep interest rates at 0, and print money in excess of 100 billion a month.

What does it say when the Chinese do right and we do wrong? Sad times.

[benjamin harrison]

11:05 AM on 12/27/2010

you don't even have a clue why they are doing that do you?

[katooom]

11:09 AM on 12/27/2010

I think he does.

[Ron1951]

01:46 PM on 12/27/2010

If you have a clue, perhaps you would share your knowledge in this forum. After all, that is the point of the forum--to increase the public's knowledge, not throw out one liners.

Having spent a lot of time in China over the years, the government there has over a billion people to deal with, while developing a middle class for political stability. Yes, there are some notable bubbles in their economy, but given our lack of vision or success in dealing with our own banking and real estate bubbles, who are we to criticize an alternative policy?

[oilfield]

01:30 PM on 12/27/2010

learn mandarin!

[Ron1951]

01:47 PM on 12/27/2010

Good idea. My 8 year old niece is a second grader and she is taking her second year of Mandarin classes. Boy, the French lessons forced on me during my grade school education surely have served me well--NOT.

[notdarkyet]

10:31 AM on 12/27/2010

Who couldn't see this coming?

[tinman1967]

10:02 AM on 12/27/2010

This is what the US should be doing.

[ambrecel]

10:18 AM on 12/27/2010

You're probably correct.

[benjamin harrison]

11:09 AM on 12/27/2010

wrong..china's economy has been growing(expansion)at an alarming rate over the past few years and most economost know that they are due for a good sized contraction which has most likely been hidden by them up until this point.

[Lahonda]

12:48 PM on 12/27/2010

The US should be stopping the ME wars. But then that would require the support of the right and the corporatists. Jimmy Carter's visionary statements on weaning ourselves off ME oil should be ringing in our ears.

[TexanResistance]

11:50 AM on 12/28/2010

All Obama has to do is order them to come home. HE DID Promise to do that, did he not? Where is Code Pink to keep him honest?